The Central Bank of Kenya has raised the base lending rate to 8.25 per cent, setting room for expensive loans that will hit hard households and SMEs.
This is up from 7.5 per cent, which had been retained by its Monetary Policy Committee (MPC) in July.
“The committee noted the sustained inflationary pressures, the elevated global risks and their potential impact on the domestic economy and concluded that there was scope for a tightening of the monetary policy in order to further anchor inflation expectations,” CBK governor Patrick Njoroge said on Thursday.
Since the scrapping of the interest rate cap in November 2019, commercial banks have been charging interests to an upward of 20 per cent, which has seen individual and businesses pay more for credit.
The move to increase the base lending rate now sets ground for local commercial banks to increase their interest rates even further, making borrowing more expensive.
Such a move however is likely to cushion the local currency as it attracts foreign dollar-based investments.
While it reduces borrowing, it could also tame inflation as few people with purchasing power chase available goods and investments.
The last time the base lending rate was at such a level was in January 2020.
Financial experts, however, said there has been marked progress in private sector credit growth, after the CBK took Covid-related monetary easing measures.
Private sector credit growth has more than doubled from 6.1 per cent in July 2021 to 12.3 per cent in July 2022, and increased further to 12.5 per in August 2022, financial risk analyst Mihr Thakar said.
The trend towards aggressive monetary tightening in the US and imported inflation has pushed the MPC to take measures to protect the shilling and consumers from rapid price growth, he added.
“Moreover, the recent measures announced by the government to cut government spending by at least Sh300 billion will decrease availability of government paper, forcing banks to redirect their lending appetite to entrepreneurs,” Mihr said.
The MPC met against a backdrop of significant global uncertainties, volatile financial markets, a weaker growth outlook, persistent inflationary pressures, geopolitical tensions, lingering effects of the Covid-19 pandemic and measures taken by authorities around the world in response to these developments.
Kenya’s overall inflation increased to a five-year high of 8.5 per cent in August from 8.3 percent in July, due to increases in food and fuel prices.
Food inflation remained elevated at 15.3 per cent in July and August, largely due to prices of maize grain and flour, edible oils and wheat products due to the impact of supply chain disruptions.
Fuel inflation increased to 8.6 per cent in August from 8.0 per cent in July, mainly driven by fuel and gas (LPG) on account of higher international oil prices.
“Overall inflation is expected to remain elevated in the near term, due in part to the scaling down of the government price support measures, resulting in increases in fuel and electricity prices, the impact of tax measures in the 2022-23 budget and global inflationary pressures,” CBK said.
The global economic outlook has weakened, reflecting the impact of a rapid tightening of monetary policy in advanced economies, particularly the US, the ongoing war in Ukraine and the lingering pandemic-related disruptions, especially in China.
Even so, CBK said leading indicators of economic activity for the Kenyan economy showed continued good performance in the second quarter of 2022.
Robust activity in transport and storage, wholesale and retail trade, construction, information and communication and accommodation and food services supported this.
“The economy is expected to remain resilient in the remainder of 2022, supported by the services sector despite subdued performance in agriculture and weaker global growth,” Njoroge said.
Two of the surveys conducted ahead of the MPC meeting—the CEOs Survey and Private Sector Market Perceptions Survey—revealed stronger optimism about business activity and economic growth prospects for 2022.
The optimism was attributed to positive sentiments and renewed investor confidence following the conclusion of the elections, increased business activity post-election and anticipated new government policies.
Nevertheless, respondents remained concerned about domestic and global inflation, energy costs, poor weather conditions and the continued war in Ukraine.
The survey of the agriculture sector revealed that prices of some food items, particularly vegetables, have declined due to increased supply with the improved weather conditions and onset of the harvest season.
Additionally, respondents expect agricultural output to improve in the next harvest season.